Why Apple's Dominance in China Has Only Just Begun

Apple is growing rapidly in China, and the trend is only going to continue. Here's why Apple's sales in China are set to skyrocket.

Feb 25, 2014 at 9:00PM

Technology research firm IDC recently calculated that Apple (NASDAQ:AAPL) picked up one percentage point of market share in China. Apple now controls 7% of the market in China, which seems fairly insignificant, especially when compared to its closest competitors.

For example, Samsung (NASDAQOTH:SSNLF) holds the leadership status in China, with 19% market share. Samsung has a well-entrenched business in China, and due to its device offerings that reach across both the high-end and low-end price points, it seems like Apple would have a difficult time with market penetration.

However, investors should read beyond the seemingly insignificant level of Apple's current market share to understand its future potential. Apple is already growing rapidly in China, and going forward, its booming business opportunity there is just getting started.

Apple's next great frontier
Apple's business in China is growing rapidly and is quickly getting close to its largest geographies in terms of net sales. For many years, Apple's Americas and Europe segments were far and away its two-biggest regions. Recently, however, China has closed that gap thanks to outsized growth.

Apple's net sales in China grew 13% in fiscal 2013 to more than $25 billion. Growth in China far outpaced growth in the Americas and Europe, which clocked in at 9% and 4%, respectively. In the fiscal 2014 first quarter, the difference was even more striking.

According to Apple's most recent 10-Q, its net sales in China soared 29% to $8.8 billion. Sales in Europe rose just 5%, while sales in the Americas actually fell by 1%. It should come as no surprise that highly developed economies such as North America and Europe would lag, since the smartphone industry in these regions is fairly saturated. As a result, emerging economies are critical for Apple, which already derives 63% of its sales from international operations.

Apple specifically attributes new product launches in China as reasons for such out-performance, and considering its recent major deal, the groundwork is laid for that spectacular growth to continue.

An even greater opportunity in China
Apple has already realized considerable growth in China, and that doesn't include the future potential from its newly formed partnership with China Mobile (NYSE:CHL). In many respects, China represents Apple's next major growth opportunity. That's because it's really only scratched the surface there. Apple only recently began offering its products through China Mobile, which is the largest telecom carrier in China with more than 760 million customers.

The tantalizing potential of adding this many users is huge, not just in terms of device sales but also the benefits of incorporating these customers into Apple's payments and other services platforms. This stands to boost Apple's business in China even further, which was already growing rapidly before the deal with China Mobile.

After announcing the partnership with China Mobile, Apple Chief Executive Tim Cook described China as an "extremely important market for Apple." Judging by the company's success there, it's abundantly clear that China truly represents the next major frontier for Apple. Apple sold more iPhones in China last quarter than ever before, and the agreement with China Mobile will only further Apple's growth in the country.

Bank on growth in China
Apple may seemed to have leveled off in mature economies such as the United States and Europe, which could call its growth potential into question. However, it's important for investors to keep their eyes on Apple's next major growth opportunity: China. In terms of growth, Apple is already hugely successful in China, as it's nearly as important a geography as Europe.

However, Apple's growth in China is really just beginning. Until recently, Apple's devices and services weren't available to the 760 million China Mobile customers. Adding those users into Apple's ecosystem only strengthens Apple's growth potential in China, which represents an enormous opportunity in the years ahead. When Apple sealed the deal with China Mobile, CEO Tim Cook called it a watershed moment. In short order, investors will realize why.

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Bob Ciura owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and China Mobile. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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